Homeowner association insurance premiums and deductibles are increasing drastically across the country. Associations should properly communicate these increases to owners to insure adequate coverage and avoid coverage gaps.
 
All owners who live in within condominium and townhome communities should have an HO-6 or Form 6 Homeowners policy. In addition to the owners’ personal property, loss of use and personal liability, this type of policy generally offers some dwelling coverage. The dwelling coverage generally covers:

1.  The alterations, appliances, fixtures and improvements which are part of the building contained within the unit;
 
2.  Items of real property which pertain exclusively to the unit;

3.  Property which is the insured’s insurance responsibility under documents of the association; and
 
4.  Structures owned solely by the insured, other than the unit, but at the same location of the unit.
 
An HO-6 policy often covers payment of deductibles which are allocated to an owner or losses suffered by the association which are not covered by insurance but which are allocated to the owner. Therefore, increases in association deductible amounts or changes in coverage should be communicated to owners often and in a timely manner. If owners are not advised of the potential deductible amount or that the association’s coverage is being reduced, they may have inadequate coverage under their HO-6 policy.
 
Recently, many associations have received or will be receiving notice of an increase in their deductible related to wind and hail claims. Some insurance carriers now impose a 2% of Replacement Cost Wind and Hail Deductible. This means that instead of a flat deductible amount (e.g., $1000), the deductible for any claim for losses resulting from wind or hail will be adjusted less a deductible that equals 2% of the replacement cost of each damaged building. For example: If an association has three buildings damaged by hail, each with a replacement cost of $250,000, the deductible per building will be $5,000 (2% of $250,000 = $5,000). The total deductible for all buildings will be $15,000 (3 buildings X $5,000 = $15,000). Owners within each building may be responsible for their portion of the deductible.
 
If your association is authorized to charge deductibles back to owners, it is essential that owners know the association’s deductible amounts so that they can obtain sufficient insurance coverage. This is especially important when deductibles are as large as the 2% wind and hail deductible illustrated above.
 
As mentioned above, most insurance carriers’ HO-6 policies include a provision which covers “items of real property (building items) that pertain exclusively to the residence premises.” This is the policy provision where unit owners can cover their responsibility for the Association’s deductible. A small amount of this coverage is automatic in many policies. However, an owner may wish to increase the coverage amount for an additional premium. The additional premium is very small compared with the additional protection received.  Currently, there is some confusion and/or disagreement in the insurance industry about how to best cover a unit owner’s responsibility for an association’s deductible. Some agents believe the HO-6 dwelling coverage is the appropriate area but others believe it is should be covered by a loss assessments provision. Therefore, it is strongly recommended that unit owners contact their own insurance professionals to determine what coverage is included in their HO-6 policy and how the insurance company handles the deductible.
 
Orten & Hindman would like to thank Andy Cobb of Van Gilder Insurance for his assistance in preparation of this article.